Crude Oil Price / Iran-Israel crude oil will become more expensive, has India failed before too?

Crude Oil Price: The US's involvement in the ongoing conflict between Iran and Israel has further aggravated the already simmering situation in the Middle East. The US has attacked Iran's nuclear units, making the region once again the center of global turmoil. Its impact will not be limited to the diplomatic front, but its echo can be felt in the economy of the whole world—especially in those countries that depend on crude oil imports. India is the biggest and most direct example of this crisis.

Tension in the Middle East and surge in crude oil prices

Iran is a major oil producing country and controls important sea routes like the Strait of Hormuz. Recently, Iran has expressed its intention to close this route, which can have a serious impact on global oil supply. Oil prices have already jumped by 14–15%. If this route is closed, experts believe that prices can reach $110–120 per barrel.

Impact on India's economy

India imports about 90% of its crude oil needs. In such a situation, a sharp rise in oil prices can have a negative impact on India's import bill, value of rupee, inflation and ultimately GDP growth. Every time oil becomes expensive, inflation in India rises, trade deficit widens and growth rate slows down.

Glimpse of history: 2008 crisis

When oil prices reached $147 per barrel in 2008, India's GDP growth slipped to 3.1%, which usually remains between 7–8%. After this, when oil became expensive again in 2011–12, the GDP growth rate shrunk to 5.2%. At the same time, the average annual inflation rate between 2008 and 2012 was 9.9%, whereas today it is at 5.5%.

Why is the situation different today?

However, currently crude oil prices are between $75–80 per barrel, which is much lower than the 2008 peak. Talking about inflation adjusted real prices, today's rates are 66% lower than in 2008. A major reason behind this is America's oil production. Since 2012, America has doubled its production and has now become the world's largest oil producer.

This means that even if tensions increase in the Middle East, global prices can remain under control due to diversity in supply and American production. This is the reason why this time the impact of the oil crisis may not be as severe as it was seen in 2008 or 2012.

Will history repeat itself again?

Today India has more strategic oil reserves, better monetary policy, and the inflow of external capital like FDI continues. Apart from this, work is being done rapidly on alternative sources of energy like solar and wind energy in the country.

Nevertheless, it is certain that if oil prices remain above $100 for a long time, the pressure on India's economy will increase. In such a situation, the government will have to take policy decisions like subsidy rebalancing, tax cuts or control in public expenditure.